The investment firm set up to float three sites formerly owned by co-living operator The Collective has revealed new details of its proposed deal – and what it hopes to achieve once the IPO is done and dusted.
GCP Co-Living REIT aims to raise £300m in a listing set for early March. It will then buy a £425m seed portfolio comprising three sites formerly owned by The Collective, which entered administration last year – two landmark operational schemes at Old Oak and Canary Wharf, and a scheme under development at Westbourne Park, W9.
The deal – which has been known within investment manager Gravis Capital Management as “Project Amethyst” – will be a big test of investors’ appetite for listed real estate. During the course of the pandemic, it has been more usual to see property companies snapped up from the public market than join them, and some proposed IPOs have failed. GCP Co-Living’s float would mark the first REIT listing since that of Home REIT in October 2020.
But it will also be a sizeable barometer for the co-living market, not least given the struggles of The Collective to build – and later sell – a viable business in the nascent sector. Now, GCP Co-Living’s prospectus for the planned IPO shines a light on some of the risks the new venture will face, as well as the rewards the team hopes will attract investors. Here are some takeaways.
The first assets
The Canary Wharf and Old Oak sites, as well as the Westbourne Park development, were owned by The Collective (Living) Limited. After The Collective went into administration last September, those and other assets were acquired by an acquisition vehicle structured by lenders including GCP Asset Backed Income (UK), for which Gravis also acts as investment manager.
Between Canary Wharf and Old Oak, the two schemes represent the two largest purpose-built co-living assets in London and account for up to 88% of all purpose-built, operational co-living beds in the capital.
The 22-storey Canary Wharf tower comprises 705 bedrooms, has a current occupancy of 94% and is valued at £189.7m. Old Oak, with a 95% occupancy rate, includes 546 bedrooms across 11 storeys and is valued at £118.5m. And Westbourne Park, expected to be complete in 2024, will have 332 rooms. The development project is valued at £119.6m.
Across Canary Wharf and Old Oak, most tenants are private renters and millennials under the age of 35. The median annual income of residents at Old Oak is £30,000, and in Canary Wharf £40,000.
Canary Wharf is the focus. Exeter-based GCP Co-Living hopes to raise £300m, but has said that the IPO might only secure £200m. If the deal only raises that minimum and the REIT is unable to secure debt facilities for both operational sites, it will prioritise the purchase of Canary Wharf. If it raises the minimum but also secures appropriate debt, it will prioritise the two operational assets and not the Westbourne Park site.
PGIM to line up £140m loan
Canary Wharf and Old Oak have separate debt facilities with Lloyds Bank and Deutsche Bank respectively.
GCP Co-Living is negotiating a term sheet with PGIM Real Estate to refinance those two funding lines with a single debt facility. The new funding is likely to be a £140m, seven-year facility with an interest rate of 1.95-2.15% margin above the swap rate.
The REIT aims to have gearing capped at 55% of gross assets.
More deals to come
Gravis has lined up a pipeline of further deals for the REIT totalling £1bn. It comprises 4,000 beds across 11 sites, and includes single assets as well as portfolios, ranging in value from £21m to £420m.
The largest are a four-site, 1,400-bed operational portfolio valued at £420m and a two-site, 1,500-bed scheme under development valued at £390m.
“The majority of the pipeline assets have been identified through off-market opportunities, through a selection of established contacts,” the REIT said. “The vendors are motivated to sell for a variety of reasons, including the disposal of a non-core business strategy and capital recycling.”
Big opportunity
The UK residential investment sector could be worth £151bn by 2025, the REIT said, representing growth of £50bn over the next five years. More than two-thirds of that growth is set to come from the private rented and co-living sector.
The REIT singles out four macro-drivers of demand growth for the co-living sector: a growing unaffordability of housing; increasing urbanisation; social changes, such as an increasing average age of marriage; and constrained housing supply.
The traditional UK private rented sector is characterised by fragmented ownership, poor quality and non-professionally managed assets, the REIT added. In that context, co-living is the future and the firm could gain an “early mover advantage”.
Following inclusion of co-living in the London Plan as way to address housing need, Gravis expects similar policy in other urban centres. This paves the way for development in other cities, a move that former asset owner The Collective had not pursued.
Eyes on yields
Gravis says the yields offered in the co-living sector are “highly competitive” compared with those in BTR and PBSA, and expects the market yield to be “somewhere between these two sectors”.
“The current yield spread of over 100 basis points to these established living sectors provides potential for yield compression in the future as yields converge as experienced in the PBSA market,” the REIT says, adding that the likelihood of this is strengthened as co-living attracts institutional investment and the volume of assets being traded increases.
The REIT expects a blended net initial yield across the three seed portfolio assets of 4.7%.
Downside risks
GCP Co-Living will be the first listed property investment trust to focus solely on the co-living sector. That in itself creates concentration risk. And the REIT acknowledges that any property market recession or deterioration of the co-living market could make it harder to attract tenants or lead to a rise in resident defaults.
Covid continues to loom over the markets. The REIT said long-stay occupancy levels at Canary Wharf and Old Oak stood at 80% during the first UK lockdown and 84% during the second, and that short-stay occupancy at Canary Wharf “has stabilised following a period of volatility over the pandemic”. But uncertainty over the outlook remains a worry.
“The long-term effects of Covid-19 on the group cannot be predicted, and the future developments of the pandemic remain highly uncertain,” the REIT said. “The effects of Covid-19 are likely to continue for the foreseeable future, increasing the levels of risk in a number of areas. In particular, the outbreak could increase the risk of vacancies or resident default, the extent of which could vary significantly by location and resident demographics.”
To send feedback, e-mail tim.burke@eg.co.uk or tweet @_tim_burke or @EGPropertyNews
To send feedback, e-mail emma.rosser@eg.co.uk or tweet @EmmaARosser or @EGPropertyNews
